How a net zero future drives infrastructure asset growth

Magellan clearbridge investments infrastructure net zero

26 April 2023
| By Jasmine Siljic |
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As the global economy moves toward a decarbonised world, infrastructure and utilities will continue to see greater portfolio allocation.

According to Gerald Stack, Magellan deputy chief investment officer and head of infrastructure, the asset class had shown “reliable and predictable performance” during its recovery from pre-pandemic levels. 

Magellan estimated that the infrastructure sector had returned 10.5 per cent over the last six months. Regulated utilities returned 10 per cent on average in the same period, as well as transport infrastructure assets returning 12.5 per cent.

The rise in ESG funds and the move towards a decarbonised world were largely underpinning the utilities industry’s growth, particularly North American utilities.

Charles Hamieh, managing director and portfolio manager at ClearBridge Investments, said: “There’s no sector that is more at the forefront of achieving [net zero emissions] than infrastructure utilities. A lot of capex required to achieve net zero will be driven by large-scale utilities and a lot of those companies are listed.

“Electrifying the grid is probably the only way we can get close to achieving net zero, and that means renewable energy spend,” he added. 

“It means EV charging stations; it means strengthening transmission and distribution lines to deal with the variability of renewable energy. It means utilities, scale, battery technology, hydrogen technology, all that is occurring in listed companies.

“So the sector plays a very pivotal role and will continue to do so for many, many years.”

In Hamieh’s ClearBridge Global Infrastructure Value fund, it had 37 per cent allocated to electric utilities and 3.4 per cent allocated to renewable energy. 

Looking at Magellan’s portfolio position, roughly 52 per cent was allocated to transport infrastructure and 46 per cent to regulated utilities. On the utilities side, three-quarters of the 46 per cent was allocated to electric utilities. 

“What we like about electric utilities is they have a very robust business model and earn a fair return and secondly, they are extremely well placed in the transition to a net zero emission economy.

“For the world to get to a net zero emission economy, a few things have to happen, we need to invest significant amounts of money in renewable energy; that renewable energy is connected to the grid and then we need to invest significantly in the distribution grid as well as the transmission grid and electric utilities benefit from all of those factors.

“As we move forward over the next 20 to 30 years, we expect there to be significant capital allocated and electric utilities should be beneficiaries of that.”

Impact of travel

Meanwhile, the reopening of the global economy and the growing number of flight passengers returning were also driving financial and investment performance in airports.
 
Despite the progressive improvements, global passenger numbers had decreased by 15 per cent at the end of February 2023 compared to the same month in 2019.

Looking at the regions, North America’s passenger numbers were down by 2 per cent. Europe’s numbers had decreased by 15 per cent and the Asia Pacific region was largely down by 26 per cent. 

“In Asia Pacific, it has been a much slower reopening. It’s really international travel that is dragging the chain,” Magellan’s CIO said.

As global economies continued to open up, helped by China’s reopening after a long period of lockdown, the fund managers expected passenger numbers to soar back to 2019 levels by 2024. 

In addition, toll roads’ returns had increased by 15 per cent over the last six-month period.

“Traffic came back a while ago, and we’ve been running at 2019 levels of traffic for about 12 months,” Stack commented. 

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